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Despite the government’s long-term plans to diversify the economy, the hydrocarbon sector will continue to dominate the Omani economy over the medium term, leaving banks’ earnings susceptible to volatility

Oman’s banking system relies too heavily on oil wealth and is overly exposed to the construction and real estate sectors, a report has claimed. Moody’s Investor Services said yesterday that while the country continued to rely on revenue from the oil and hydrocarbon sectors, banks would continue to suffer the effects of volatile global markets. “A key structural weakness is Omani banks’ limited geographic diversification and high dependence on the domestic economy, which in turn relies on the volatile oil sector,” the report stated.

Susceptability

“Despite the government’s long-term plans to diversify the economy, the hydrocarbon sector will continue to dominate the Omani economy over the medium term, leaving banks’ earnings susceptible to volatility.” At the same time, Moody’s noted that credit risks remain high, due largely to exposure of banks to the construction and real estate sectors, which, it said, are showing signs of distress. Moody’s retained its stable outlook for the sector, pointing to an expected expansion in the country’s GDP of 2.9 per cent in 2011. It also noted that Omani banks had solid capitalisation, stable funding and high liquidity buffers as well as low levels of non-performing loans.

Elena Panayiotou, Moody’s analyst and author of the report, was also positive about the efforts of the government to diversify the economy. “We forecast that Oman’s real GDP will likely expand by 2.9 per cent in 2011, fuelled by high oil prices and increased oil production, while accelerated public spending will also stimulate economic growth outside the oil sector,” she said. “The improved operating environment will support banks’ asset quality, drive credit growth — likely to be 10 to 15 per cent over the outlook horizon — and increase bank revenues. Moreover, non-performing loans will likely remain at low levels over the outlook period, at 3 to 4 per cent of total loans.” “The deposit-funded system will continue to benefit from strong ties with the Omani government, which contributes around 30 per cent of sector deposits, forming a stable, although concentrated, funding source,” said Panayiotou. But the reliance on government sources, couple with the concentrated nature of private wealth in Oman, could prove to be a double-edged sword, the report claimed. “There is a risk of contagion between banks in case of a corporate default, because large private and corporate customers typically have exposures to several banks within the system,” the report said.